Dow hiking prices as much as 20 percent

High energy prices have led Dow Chemical Co. to lower the boom on its customers.

Midland, Mich.-based Dow announced May 28 it will raise prices of all of its plastic and chemical products by as much as 20 percent June 1. Officials said the amount of the increases will depend on each product's exposure to rising energy, feedstock and transportation costs. All terms to all customers also will be reviewed.

``Our first-quarter feedstock and energy bill leapt a staggering 42 percent year over year, and that trajectory has continued,'' said Andrew Liveris, Dow chairman and chief executive officer, in a news release. ``The new level of ... energy costs is putting a strain on the entire value chain and is forcing difficult discussions with customers about resetting the value proposition for our products.''

The only increase confirmed by Chris Huntley, Dow's spokesman, was a 5 cent move on all grades of polyethylene for June 1.

Price increases for other Dow plastic products - including polypropylene, polycarbonate, ABS, polyurethane, epoxy and specialty plastomers, elastomers and copolymers - also will occur June 1, but details could not be verified.

``We don't see this as a short-term issue,'' Huntley said. ``Even if oil were to go down to $100 a barrel, that's a huge number and we have to address that. We have to live in a new reality where higher costs mean higher prices.''

Crude oil prices were around $127 per barrel May 29, an increase of about 50 percent since late January. Prices for natural gas were around $12 per million British thermal units May 29, up about 50 percent since early February. By comparison, prices rose about 10 percent for common grades of PP and about 7 percent for common grades of high density PE during that same period.

The 5 cent move on PE equates to an increase of 5-7 percent, according to the Plastics News resin pricing chart. Officials at Chevron Phillips Chemical Co. LLC, a Houston-based firm that's a major producer of HDPE, said they ``are looking at moves based on increasing costs,'' but had taken no formal action as of May 28.

In PP, market leader LyondellBasell Industries AF SCA has announced an increase of 8 cents per pound for June 1. Most other major producers are expected to match LyondellBasell's move, industry contacts said. Officials with Dow's epoxy business said May 29 that the unit will ``raise prices as necessary,'' but offered no details.

Earlier in May, Dow's European units announced June 1 price increases equaling 31/2 cents per pound on PP, 7 cents per pound on ABS and styrene acrylonitrile, 8 cents per pound on PS and 101/2 cents per pound on PE.

And pricing pressure might be even stronger in the second half of 2008, according to Robert Bauman, a market analyst with Nexant Inc. in Houston.

``If [resin makers] aren't able to raise prices, we're probably going to see older plants shut down to handle costs and increase operating rates,'' he said.

The pressure on plastics processors also is likely to increase, Bauman added.

``If you look at [mergers and acquisitions] and Chapter 11 [bankruptcy] filings in the last 12 months, it's been much more intense on the processing side,'' he said. ``Any processor that has a fixed price to a large customer is in trouble. They're going to want to renegotiate their contracts, but places like Wal-Mart and Target aren't interested in that.''

Industry analyst Robert Eller said Dow's upward move on pricing will have numerous effects on the plastics supply chain. Those effects include increased value being placed on down-gauging in packaging and elsewhere, according to Eller, owner of Robert Eller Associates LLC in Akron, Ohio.

Other potential effects on plastics firms, Eller said, are the substitution of stand-up pouches for cans and bottles, downgrading of product designs, offering of lower-quality resin grades and increased value of recyclate-based products.

Dow already had taken major steps involving its plastics businesses in the past year. The firm placed its PE, PP and PC assets into a joint venture with Petrochemical Industries Co. of Safat, Kuwait, in a deal that netted Dow $9.5 billion. Dow also has combined its polystyrene assets with those of Chevron Phillips to create the Houston-based Americas Styrenics venture.

In February, Dow announced that it was looking to sell, realign or form joint ventures with some of its remaining plastics businesses, including specialty copolymers and Saran-brand polyvinylidene chloride resins and specialty films. Those businesses have been placed in a separate business group. The firm's ABS resin business also has exited all markets but automotive.

The big price hike is viewed as positive by Kevin McCarthy, a stock analyst with Banc of America Securities LLC in New York.

``We are seeing a new sense of urgency at Dow and its competitors to pass along escalating and volatile costs in an environment of decelerating demand,'' McCarthy wrote in a May 28 note to investors. He added that the move was spurred by ``a growing unwillingness among chemical producers to function as an energy shock absorber.''

Plastics accounted for almost 52 percent of Dow's $53.5 billion sales total in 2007. Pretax profit in Dow's basic plastics unit - including PE, PP and PS - was flat in 2007, while in performance plastics - including PC and Saran - pretax profit fell 15 percent. Dow's overall profit fell 23 percent in 2007 to less than $2.9 billion.

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